Effect of expenditures in personal income taxation on horizontal equity in Croatia

Hrvoje Šimović, University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia

AbstractTax expenditures include all reliefs and other tax procedures used for reducing or deducting the amount of tax that would otherwise have to be paid by taxpayers. There are many personal income tax expenditures in Croatia and they represent an important segment of the tax and social policies. This paper analyses the effect of expenditures in personal income taxation in Croatia on horizontal equity. Accordingly, the analysis has been made according to sources of income. The paper includes the period since 2001, when most reliefs that are still in effect were introduced into the personal income tax system. The analysis includes only those taxpayers who filed annual personal income tax returns, which is a precondition for acquiring most of the tax reliefs. The research findings show that tax reliefs significantly reduce the amount of taxable income, and the differences in the effective tax burden between the analyzed sources of income show that there is horizontal inequity in the personal income tax in Croatia.